Key Takeaways
- Current tax reflects what the entity actually owes (or is owed by) the tax authority for the period, not the accounting tax charge in profit or loss.
- The calculation uses the tax rate enacted or substantively enacted by the balance sheet date, even if the rate changes before the return is filed.
- Underprovision or overprovision from the prior year flows through the current period's tax line, and differences above 5% of the total tax charge often signal estimation weaknesses.
- Current tax and deferred tax together make up the total income tax expense in the statement of profit or loss.
What is current tax?
Every year, we've seen engagement teams tie the PBT number to the TB, apply the headline rate, check the arithmetic, and sign off the tax line in under an hour. Then the final assessment arrives six months later showing a variance that traces back to a disallowed expense nobody tested. The current tax balance is one of the most commonly under-audited lines on the FS, partly because teams confuse the accounting tax charge with the amount the entity actually owes.
IAS 12.5 defines current tax as the amount of income taxes payable (or recoverable) in respect of the taxable profit (or tax loss) for a period. The starting point is not accounting profit. It is taxable profit, which the entity derives by adjusting accounting PBT for items that are non-taxable or non-deductible under the applicable tax law. IAS 12.12 requires the entity to measure current tax liabilities (and assets) at the amount expected to be paid to (or recovered from) the tax authorities using the rates enacted or substantively enacted at the reporting date.
On a practical engagement, the current tax calculation sits in a tax computation that bridges accounting PBT to taxable profit. The auditor tests this bridge. Typical adjustments include disallowed expenses (entertainment, fines, penalties, non-deductible provisions) and exempt income (participation exemptions in Dutch and German tax law, for instance). Timing differences that create deferred tax rather than current tax are separated at this stage. IAS 12.58 requires current tax and deferred tax to be recognised as income or expense in profit or loss unless the tax relates to items recognised outside profit or loss (in OCI or directly in equity).
ISA 540.13 (a) applies because the current tax balance depends on management's interpretation of tax law, particularly where the treatment of specific transactions is not settled. The auditor evaluates whether the entity's method for computing taxable profit is appropriate and whether the inputs (applied tax rates, disallowance schedules, relief claims, loss carry-forward computations) are supported by the tax legislation and the entity's own filings.
Worked example: Rossi Alimentari S.p.A
Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi reports PBT of EUR 5,200,000. The Italian corporate income tax (IRES) rate enacted as at 31 December 2025 is 24%. The regional production tax (IRAP) applies at 3.9% on a different base but is outside the scope of IAS 12 for this example. Rossi has three significant tax adjustments.
Step 1 — Identify permanent and temporary differences
Rossi incurred EUR 180,000 in entertainment expenses that are non-deductible under Italian tax law. It received EUR 320,000 in dividends from a 25%-owned Italian subsidiary qualifying for the 95% participation exemption (EUR 304,000 exempt, EUR 16,000 taxable). Depreciation for tax purposes exceeds accounting depreciation by EUR 140,000 (a temporary difference creating a deferred tax liability).
Documentation note: prepare the accounting-to-taxable profit bridge. Record each adjustment with its statutory reference (TUIR article for Italian tax law). Separate permanent differences from temporary differences, as only permanent differences affect current tax in isolation. Cross-reference to the entity's draft tax return where available.
Step 2 — Compute taxable profit
Start with PBT of EUR 5,200,000. Add back non-deductible entertainment of EUR 180,000. Subtract exempt dividend income of EUR 304,000. Subtract excess tax depreciation of EUR 140,000. Taxable profit is EUR 4,936,000.
Documentation note: cross-reference each adjustment to the supporting schedule. The excess tax depreciation creates a taxable temporary difference that the deferred tax computation will pick up separately under IAS 12.15 .
Step 3 — Apply the enacted rate
Current tax payable is EUR 4,936,000 multiplied by 24%, producing EUR 1,184,640.
Documentation note: confirm the 24% rate was enacted (not merely proposed) at 31 December 2025 per IAS 12.46 . Attach the legislative reference.
Step 4 — Assess prior-year adjustment
Rossi's FY2024 current tax provision was EUR 1,050,000. The final tax assessment received in October 2025 confirmed a liability of EUR 1,072,000, producing an underprovision of EUR 22,000. This flows through the FY2025 income tax expense under IAS 12 .
Documentation note: record the prior-year variance and the cause of the underprovision (a disallowed expense identified during the tax authority's review). Confirm the adjustment is reflected in the FY2025 tax line. If the underprovision exceeds the firm's threshold for prior-year variances, investigate whether the estimation process needs improvement.
Conclusion: Rossi's current tax payable of EUR 1,184,640 for FY2025 is defensible because the accounting-to-taxable profit bridge is fully reconciled and each adjustment ties to a statutory provision. The enacted rate is verified at the reporting date and the prior-year variance is documented with its root cause.
What reviewers and practitioners get wrong
- Teams frequently test the current tax balance by recalculating the tax charge at the statutory rate applied to PBT, without verifying the individual adjustments in the accounting-to-taxable profit bridge. The approach is essentially SALY: take last year's WPs, update the numbers, move on. IAS 12.79 requires disclosure of a reconciliation between the tax expense and accounting profit multiplied by the applicable rate. When the auditor does not test the components of that reconciliation, errors in the treatment of non-deductible expenses or exempt income pass through unchallenged. ISA 540.18 requires evaluation of the reasonableness of the point estimate, which means testing the inputs to the bridge, not just the output.
- Prior-year current tax provisions are often rolled forward without comparison to the final tax assessment. When the assessment arrives and shows a variance, the adjustment is booked but the root cause (a recurring disallowance the entity fails to anticipate, or an overly conservative provision) is not investigated. Repeated over- or under-provision in the same direction is a pattern the auditor should flag under ISA 540.32 (a) as an indicator of possible management bias. It is disheartening to see the same 8% underprovision three years running without anyone asking why the estimation process keeps missing the same adjustments.
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Frequently asked questions
How do I document the current tax computation in the audit file?
Obtain or prepare the accounting-to-taxable profit bridge and test each material adjustment to its statutory basis. Document the enacted tax rate with a legislative reference, verify the arithmetic, compare the computed liability to the amount the entity recorded, and trace each bridge adjustment to the supporting schedule or tax return workpaper. IAS 12.79 requires a rate reconciliation in the notes, so confirm the entity's reconciliation ties to your tested bridge.
What happens if the tax rate changes after the balance sheet date but before filing?
IAS 12.46 requires the entity to measure current tax at rates enacted or substantively enacted at the reporting date. A rate change announced after that date does not affect the current tax calculation. If the change is significant, IAS 10.21 requires disclosure as a non-adjusting subsequent event. The new rate will affect the deferred tax balance going forward, not the current period's current tax.
Does current tax include uncertain tax positions?
If the entity has taken a position in the tax return whose acceptance by the tax authority is uncertain, IAS 12 requires the entity to reflect that uncertainty in its current tax measurement. IFRIC 23 (now part of IAS 12 following the 2021 annual improvements) provides the framework: the entity either uses the most likely amount or the expected value method depending on which better predicts the resolution. The auditor tests the probability assessment under ISA 540.13(a) and evaluates whether uncertain tax positions have been identified completely.